We believe that a well-organized
business process for collecting and computing TDC that
includes detailed, future-look-ing data and optimization
technology will enable supply chain managers to accurately assess the trade-offs
among the different components of cost; identify
which products and customers should be prioritized; and
determine at what price customers should be served.
BENEFITS OF TOTAL DELIVERED COST
Total delivered cost is the complete cost of producing and
delivering products to your customers. It includes the cost
of sourcing raw materials, manufacturing bulk and intermediate products, packaging of finished goods, inventory
holding costs, transportation, distribution, and final delivery to the customer. Some elements of TDC are built from
per-unit variable costs associated with the specific product
and customer, while others are allocated fixed costs from
production lines, plants, or other fixed assets used in the
manufacturing, storage, and delivery of the product. TDC
typically is reported as a per-unit cost for each product
at each customer. However, for customers that purchase
a large number of products, the aggregate delivered cost
or aggregate gross profit are better measures to use to
determine the attractiveness of a given customer/product
portfolio.
Many companies compute some variant of TDC using
historical data. This is a very informative exercise to help
a business determine how its profits and losses developed
from recent activities. Based on our experience, however,
we believe there are a number of flaws in some of these
types of analyses. First, we have seen TDC computed at
a “product family” or “customer hierarchy” level without
diving into the details at the individual product or custom-
er ship-to level. This type of analysis can point the business
in the direction of large groups of products or customers
that are not meeting profitability targets, but they don’t
adequately identify which products or which customers are
the real drivers of business profitability. Second, this histor-
ical TDC tells a company where it has been, but it doesn’t
necessarily tell it where it should be going.
Leading companies have begun to integrate this computation into their supply chain planning processes, especially
their network design and analysis activities. By using TDC
as a metric in analyzing supply chain network configuration and operations, companies are able to determine the
profit margin on each sale at the customer and product
level of detail. This enables them to evaluate both the costs
of supplying products through their supply chain network
and the revenue those products produce, across a number
of different network options. Conversely, pairing TDC with
expected pricing allows a company to evaluate the impact
of imposing a minimum gross profit-margin target on the
structure of the network. Thus, a company can consider
important business decisions like:
• What is the appropriate price for a particular product/
customer location combination to meet profitability targets?
• What is the true walk-away price during a competitive
negotiation?
• What is the best allocation of production capacity
among different product families?
• What is the impact of increasing volume and dropping
price (and vice versa) for a given customer?
• For which products, industries, and regions should we
be looking to sell additional volume?
While TDC is not the only criterion in determining the
answer to critical business decisions like those listed above,
it is an essential factor in arriving at the best strategic decisions for a company. In addition, the ability to identify
profitability at a product/customer level provides critical
information to effectively maximize profit by ensuring that:
• Constrained capacity resources are directed toward the
most profitable products and customers
• Negotiated prices meet target rates of profit
• Data-based decisions are used when sales or marketing
managers suggest “strategic reasons” for serving a particular customer
• Growth is directed toward the best products and
geographies
Focusing on the product/customer level of detail also
